Inequality in the spotlight

| November 9, 2016

Could wealth and income inequality be the reason for current volatile political situations in many countries, the ascendancy of maverick political figures and the fracturing of Australia’s political system? Dr. Veronica Sheen makes a compelling case based on French economist Piketty’s ideas.

French economist Professor Thomas Piketty’s  book Capital in the 21st century has been widely acclaimed as one of the most important contributions to understanding of the growth of inequality over recent decades and its likely trajectory in decades to come. So it was very gratifying that he visited Australia recently giving lectures at the Sydney Opera House and then at Melbourne Town Hall, where I attended, and which can be viewed online. (A very good extended interview on the ABC can be heard here.)

Piketty shows the extent of wealth concentrations and the tremendous advantage this confers. As he explained in the Melbourne lecture and as set out in his book, the more wealth you have, the more wealth you generate through premium financial advice and investment strategies. These are many and varied of course, but include tax minimisation strategies, not necessarily illegal, that serve to deprive governments of revenues for social and economic investments in areas such as education, transport infrastructure and health care. These revenues are precisely what are needed to make economies and societies strong and resilient – and fair. Furthermore, and most importantly at this time, governments need the revenue to make the investments to deal with climate change and to reduce global warming as mandated by the Paris Agreement.

Piketty shows that the less money you have the lower your returns from your investments – if you have any. At the same time, you are less likely to get ahead through labour income which in recent decades has become a less effective means of wealth redistribution and upward economic and social mobility. As noted by many commentators, wage stagnation and reduced opportunities for advancement have had a strong effect on creating volatile political situations in many countries and are fundamental to understanding the reasons so many British voted to leave the EU (Brexit), the ascendancy of maverick political figures such as Marine Le Pen in France and Donald Trump in the USA, and, perhaps also, the fracturing of Australia’s political system with the rise of minority parties in recent elections.

Most troubling about Piketty’s analysis is the intergenerational effect of wealth polarisation. While there is a myth of the meritocratic society wherein you do well because of your effort and talent, Piketty shows that this is actually not how distribution of opportunity for economic and social advancement works.

One of his powerful charts in the Melbourne lecture showed there is a direct correlation between family wealth and the university education of progeny. The poorer your family, quite simply you will be less likely to go to university. This has immense effects on the distribution of employment opportunities. In his book, he shows how there is polarisation of labour income with a few ‘supermanagers’ taking vast rewards from businesses while the wages of the majority of workers have gone backwards.

Further, Piketty predicts that on current trends it will be family wealth and inheritances that will be the main determinant of an individual’s economic status in the 21st century. This takes us back to social structures of the 19th century as so vividly observed in the novels of that era and the importance of a ‘good’ marriage for getting ahead. He discusses this in some depth in relation to Balzac’s Père Goriot set in the early 19th century. But it is a central theme in many other French and English novels such as Guy de Maupassant’s Bel Ami, recently made into a film, set later in the 19th century.

These scenarios of wealth determinants have very serious consequences for the equal opportunity aspirations of women and minority groups. In essence, the social progress that has been made over the last 100 years would retreat and old forms of stigmatisation of ‘outsiders’ take a new life as so brilliantly portrayed in Arte France’s Trepalium television series. Social welfare systems that only serve to provide a minimal survival income for the most disadvantaged have indeed taken on an increasingly punitive orientation which Dr. Tania Raffass has explicated in her recent article.

The project of women’s advancement is struggling already but would further retreat in the decades to come under the scenarios of increasing wealth inequality outlined by Piketty. Essentially the problems of the gender pay gap and, in my view, the more important gender wealth gap, are at present linked closely to the trends in wealth and income distribution. An important dimension of this, is the long-term wage stagnation for both men and women which intensified during and following the Global Financial Crisis. This issue was taken up in the book Women and Austerity: The Economic Crisis and the Future for Gender Equality edited by sociologists Maria Karamessini and Jill Rubery  (see my post here for Australian perspective).

Equal opportunity objectives for women and minority groups including older and younger workers, become more constrained under conditions of overall contraction and job loss. This has many dimensions but includes the effects of government austerity measures, which have far reaching effects on aggregate demand in economies as well as the sustenance and growth of secure jobs, especially in the public sector.

Piketty himself is highly optimistic that solutions can be found to the problems of growing inequality he identifies. His central proposition is more progressive taxation through a global wealth taxand for Australia, an inheritance tax. He also supports the various measures advocated by British economist, Professor Anthony Atkinson, in his new book Inequality: what can be done. These measures covering taxation, social protection and public employment would contribute to the capacity of governments to ensure their countries have the social, environmental and economic investments they need for a fair and prosperous society.

Professor Piketty’s research has triggered an important debate about the burgeoning levels of inequality around the world, its political impacts, and most importantly what should be done about it. It is an important one for Australia at this time with its own challenging levels of poverty and inequality.